Medium term expenditure frameworks and performance budgeting: Elements of the Quality of Public Finances

1
Medium term expenditure frameworks and
performance budgeting Elements of the Quality of
Public Finances

• Dr. Christian Kastrop
• President of the Economic Policy Committee,
  European Union

2
The Quality of Public Finances

• Quality means improving the growth and employment
  effects of public resources
• Expenditure Side Focus on long-term growth
  ("investment in the future")
• Revenue Side Taking negative financing effects
  into account
• Institutions Modern budget and accounting system

Its important to consider both Effectiveness
Efficiency Effectiveness Doing the right
things Efficiency Doing the things right
3
The European PerspectiveQuality of Public
Finance and the Stability and Growth Pact

• SGP is the fiscal framework of the EMU aims at
  ensuring budgetary discipline through two main
  requirements
• Treaty requirement to avoid excessive deficit
  positions (3 deficit and 60 debt of GDP)
• Requirement to achieve and maintain the
  medium-term budgetary objective (MTO)
• At first sight clearly quantitative aspects But
  improving the quality of public finances can
  enhance business and growth conditions, while at
  the same time allowing a better control of the
  overall public spending at the national level.
• Quality is an important factor in fulfilling
  the requirements of the SGP

4
The European PerspectiveQuality of Public
Finance and the Lisbon Strategy

• During the meeting of the European Council in
  Lisbon in 2000, the Heads of State or Government
  launched a "Lisbon Strategy" aimed at making the
  EU the most competitive and the most dynamic
  knowledge-based economy in the world by 2010
• As quality of public finances means improving the
  growth and employment effects of public
  resources, it is also a key contribution to the
  Lisbon strategy

5
Quality of public financesThe way forward (1)

• European Commissions Roadmap for Deriving a
  Conceptual Framework and a Set of Indicators

Goal
Long-term economic growth
Environmental Dimension
Composition, efficiency and effectiveness of
expenditure
Structure and efficiency of revenue systems
Fiscal governance
Layer 1 Public finance processes
Public finance policies impacting on market
functioning and business environment
Fiscal position and sustainability
Level of expenditure and revenues
Layer 2 Public finance outcomes
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Layer 1 dimensions of quality of public finances
Quality of public financesThe way forward (2)
Institutions
Expenditure
Revenue

• Fiscal Rules (debt rules, medium term budgetary
  frameworks)
• Performance budgeting and evaluations
• Efficiency of public administrations (HRM,
  information and communication technologies)

• Long term trends in the composition of public
  spending
• Efficiency and effectiveness for individual
  spending areas(infrastructure, RD, health,
  education)

• Tax expenditures
• Alternative tax bases, tax shifting across tax
  bases
• Microeconomic and macroeconomic effects of
  taxation on personal and corporate behaviors

7
Budget and Accounting SystemStarting Point for
Efficiency Improvements

• A modern budget and accounting system must
• enable strict priorization
• provide for a consistent system of reporting on
  public activities, including purposes, content
  and costs
• provide sufficient information concerning the
  political objectives and strategies as well as
  the degree to which objectives are met
• include long term financial consequences of
  decisions

8
Use of Performance Information

• The road from incremental budgeting towards
  results-based budgeting is proving to be long and
  difficult
• Results information will never completely replace
  the discussion on inputs, but will shift the
  focus
• Most OECD countries cannot imagine operating a
  budget system today without PI. Countries
  evolving their performance approach rather than
  discarding
• There is a need for more realistic expectations
  and greater efforts to get all stakeholders on
  board

9
EU-ComparisonIndex of Budgetary Procedures

• The overall total index of budget procedures
  incorporates amongst others
• Budget transparency
• multi-annual planning horizon
• process top-down budgeting
• prudent economic assumption
• performance budgeting
• numerical fiscal rules

Source EU Commission, Public Finance Report 2007
10
Current Institutional Reforms in Germany
Commission on the Modernisation of
Federation-Länder Financial Relations (FöKo II)
Reform of constitutional rules governing public
finances
Federal Ministry of Finance is working on a
reform of the Federations budgetary and
accounting system with the aim of improving
expenditure efficiency
11
Medium term expenditure frameworks and
performance budgeting Elements of the Quality of
Public Finances

• Dr. Christian Kastrop
• President of the Economic Policy Committee,
  European Union